Robert Zoellick, president of the World Bank, seeks to open a debate on the pros and cons of reintroducing a gold-standard based currency to stabilize the world’s economies. Zoellick, a former U.S. Treasury secretary, envisions a monetary system that involves “the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalization and then an open capital account…The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”
The original Bretton Woods system came into being in 1944, when representatives of all 44 Allied nations met in Bretton Woods, New Hampshire, and, signed an agreement which aimed to bring about international economic security through a system of fixed exchange rates. It also established numerous institutions, including the IMF (International Monetary Fund). Participating nations ratified the agreement in 1945. Under Bretton Woods, each member state had to maintain a steady exchange rate of its currency in relation to the price of gold (plus or minus one percent), so currencies were technically “pegged” to the price of gold.
In 1971, the U.S. faced a massive deficit and inflation as a result of the Vietnam War and other factors. President Richard Nixon “closed the gold window,” unpegging the dollar from the price of gold and bringing the Bretton Woods system to an end. This effectively allowed international currencies to float and eventually led to a situation where the U.S. dollar became the sole backing of currencies, as well as serving as an international reserve currency.
Could a new gold standard or a Bretton Woods II stabilize the economy in a postrecession environment? To learn more about Bretton Woods and the gold standard, click the following links: